Proposed amendments to the Income Tax Act were released today which include the
"Family Tax Cut". The media is reporting this as an
income splitting proposal. I've reviewed the amendments and I
think at most I would call it simulated income splitting. In
simplified terms, here's how it works.
The Family Tax Credit is a limited tax credit for couples with
young children and unequal incomes. You're eligible for the
credit if (i) you have an "eligible relation" –
basically a Canadian resident married or common law spouse whom
you're not separated from, (ii) you have a child under 18 that
lives with you or your eligible relation (and presumably with both
of you since you're not separated), (iii) you're
resident in Canada, and (iv) you didn't spend 90 days or more
in prison (!).
If you're eligible, you run through the following steps:
Step 1. Calculate the combined tax liability
for you and your spouse. (A)
Step 2. Now calculate the adjusted combined tax
liability for you and your spouse, as though the higher income
spouse had transferred enough income to the lower income spouse to
equalize their taxable incomes, to a maximum of a $50,000 transfer
(i.e. an income differential of $100,000). (B)
Step 3. If the difference between combined tax
(A) and adjusted combined tax (B) is greater than $2,000, the
higher income spouse gets a tax credit of $2,000. If (A) –
(B) is less than $2,000, the credit is the amount of the
So for eligible spouses, their respective taxable incomes
aren't changed in the end, and your applicable marginal tax
rates will be the same. Instead, the higher income spouse simply
gets a tax-reducing credit (up to $2,000) to simulate the effect of
Given the limited scope of these proposals, structuring where
possible to achieve actual income splitting will remain important
for high income earners.
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